LONDON — The pound's role as an international reserve
currency is going to be permanently diminished as a result of the
UK's vote to leave the European Union, according to new research
from Deutsche Bank.

"The pound’s diminishing role in international capital flows
post-Brexit should permanently reduce its reserve status,"
Deutsche forex strategist Robin Winkler writes in a note
circulated to clients on Wednesday.

Winkler argues that the pound's role in the IMF's currency
composition of official foreign exchange reserves index (more
often known as COFER) has likely fallen significantly in recent
months, although it is yet to show up in official data.

Deutsche argues that China has begun to move its forex
reserves away from the pound and into other currencies, but
because China has only recently started to report the composition
of its reserves. "China only started to report allocations over
that period may have masked a drastic slimming in their former
pound overweight," Winkler writes.

He continues (emphasis ours):

"In a model of China’s currency allocation we describe
elsewhere, we estimate that the pound’s share has likely fallen
from close to 10% into low single digits since early 2015 (chart
2), consistent with the PBoC transitioning from wealth to
currency management. The pound may offer value but is
increasingly irrelevant."

"Sovereigns controlling a reserve currency benefit from
extensive external and monetary flexibility, which supports
government creditworthiness. A U.K. departure from the EU could
put sterling's reserve status at risk by deterring foreign direct
investment and other capital inflows into the
U.K," S&P Global Ratings analyst Frank Gill wrote
at the time.